Shirking may exist in any wage contract and
can be costly to prevent. Piece-rate contracts are
preferred to hourly wages if monitoring output
. costs less than enforcing input ๅ(Cheung, 1969 ),
while such contracts also reveal productivity differentials among workers more clearly than any
. other payment scheme (Cheung, 1983) . However,
with piece rates the worker is inclined to be
‘sloppy’ and produce products of inferior quality,
that is, to exploit opportunities to shirk on quality. Thus, piece rates may be less desirable if the
physical attributes of the product are such that it
is relatively costly to police a specified standard.
The root of the problem lies with high information costs; it is necessary to recognize that firms